SVB failure is a ‘written case of ‘mismanagement’

Less than three weeks after the failure of the Silicon Valley bank, Vice President of Federal Oversight Michael Barr will tell lawmakers on Tuesday that the collapse was a typical case of mismanagement after the country’s largest bank fell into receivership in a matter of days.

“SVB failure is a typical case of mismanagement,” Barr He reads the testimony. “The bank had a focused business model that catered to the technology and venture capital sector.”

Barr’s testimony will come just one day after First Nationals announced a deal to acquire the Silicon Valley bank Loans and deposits from the FDICwhich has been leading the bank since March 10.

Barr notes that the company grew “by leaps and bounds” during the pandemic, with deposits rising rapidly, and those proceeds largely ended up flowing into longer-term securities such as Treasuries and mortgage-backed securities.

“The Bank did not effectively manage the interest rate risk of those securities or develop effective tools, models and metrics for measuring interest rate risk,” Barr will say.

“At the same time, the bank failed to manage the risk of its liabilities. These liabilities consisted largely of deposits from venture capital firms and the technology sector, which were highly concentrated and could be volatile.”

Barr will tell lawmakers that “the failure of the SVB requires a comprehensive review of what happened, including the Fed’s oversight of the bank.” “I am committed to ensuring that the Federal Reserve is fully accountable for any supervisory or regulatory failures, and that we fully address what went wrong.”

Barr’s key message that the SVB failure aligns with the company’s management echoes that of Federal Reserve Chairman Jerome Powell. He said last week at a news conferenceHe tells the media:[At] At the most basic level, the management of the Silicon Valley bank failed miserably, the bank grew very quickly, and they exposed the bank to significant liquidity and interest rate risks, [and] You did not hedge against this risk.”

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Run on social media

It’s the first time investors and lawmakers have heard from Barr — who is set to testify Tuesday before the Senate Banking Committee followed by the House Financial Services Committee on Wednesday — about why Silicon Valley bank failed and regulators’ response.

The Fed was responsible for supervising the SVB.

SVB was taken into receivership by the FDIC on March 10, just two days after the bank a statement It would take a loss of $1.8 billion from the sale of some securities and it would look to raise an additional $2.25 billion in capital to boost its balance sheet.

More than $40 billion was withdrawn from the bank on March 9, coinciding with the failed capital raise that eventually wiped out the bank. Barr also points to the role social media played in catalyzing what ended up being a deadly run for the bank.

Interpretation of uninsured depositors [SVB’s losses and capital raise] As a sign that the bank was in distress,” Barr would tell lawmakers.

“They shifted their focus to the bank’s balance sheet, and they didn’t like what they saw. In response, social media saw an increase in talk of the rip-off, and uninsured depositors quickly moved to flee.”

What the organizers knew

Barr’s appearance before lawmakers on Tuesday will also raise questions about what the Fed and other regulators know, when they knew about it, and what mistakes were made.

According to Barr’s testimony, towards the end of 2021, supervisors found deficiencies in the bank’s liquidity risk management, resulting in six supervisory findings related to the bank’s liquidity stress testing, emergency financing, and liquidity risk management.

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Michael Barr is sworn in as Vice Chairman of the Federal Reserve Board to oversee by US Federal Reserve Chairman Jerome Powell in the press conference room of the Federal Reserve William McChesney Martin Building in Washington, US, July 19, 2022. US Federal Reserve/Press release via Reuters

In May 2022, the supervisors released three findings related to ineffective board oversight, weaknesses in risk management, and the bank’s internal audit function.

Barr’s testimony read: “The bank waited so long to address its problems that, ironically, its late actions to finally strengthen its balance sheet sparked the movement of uninsured depositors that led to the failure of the bank.”

“The picture that has emerged so far is that SVB had inadequate risk management and internal controls that struggled to keep pace with the growth of the bank.”

In October 2022, the supervisors met with the bank’s senior management to express their concern about the bank’s interest rate risk profile. The following month, the supervisors delivered a supervisory conclusion on the management of interest rate risk to the bank.

In mid-February 2023, Fed staff highlighted SVB’s interest rate and liquidity risks and said they were actively engaged with SVB. As it turns out, the full extent of the bank’s weakness wasn’t apparent until the unexpected bank scramble on March 9th.

“We need to ask why the Bank has not been able to fix and address the problems we have identified in sufficient time,” Barr says. “It is not the job of the supervisors to fix the problems that have been identified; it is the job of the senior management of the bank and the board of directors to solve its problems.”

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Our banking system is sound

Barr says the Fed is focusing on whether its oversight is appropriate for the bank’s rapid growth and vulnerabilities, with the Fed also assessing whether higher levels of capital and liquidity would thwart an SVB failure or provide more flexibility for the bank.

On Sunday, March 12, Treasury Secretary Janet Yellen, with the unanimous recommendation of the Fed and the FDIC, approved systemic risk exceptions for the SVB and Signature failures, enabling the FDIC to guarantee all deposits of both banks.

In addition, the Fed, with the approval of the Treasury Department, has created a temporary lending facility to provide additional liquidity to banks to meet any unexpected depositor demand.

US Treasury Secretary Janet Yellen testifies before the Senate Financial Services Appropriations hearing and the At-Large Government Subcommittee on President Biden's proposed budget request for the Treasury for fiscal year 2024, on Capitol Hill in Washington, US, March 22, 2023 REUTERS/Evelyn Hoxten

US Treasury Secretary Janet Yellen testifies before the Senate Financial Services Committee and the At-Large Government Subcommittee on President Biden’s proposed budget request for the Treasury Department for fiscal year 2024, on Capitol Hill in Washington, US, March 22, 2023. REUTERS/Evelyn Hochstein

“It appears that contagion from the SVB failure could be far-reaching and cause damage to the broader banking system,” says Barr’s testimony. “The prospect of uninsured depositors not being able to access their funds may lead depositors to question the overall integrity and integrity of US commercial banks.”

Barr will say that these actions show that regulators are committed to ensuring that all deposits are safe.

“Our banking system is sound and resilient, with strong capital and liquidity. We will continue to closely monitor conditions in the banking system and are ready to use all our tools for any size institution, as needed, to keep the system safe and sound.”

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